26 U.S. Code § 125 - Cafeteria plans

Except as provided in subsection (b), no amount shall be included in the gross income of a participant in a cafeteria plan solely because, under the plan, the participant may choose among the benefits of the plan.

(b) Exception for highly compensated participants and key employees

(1) Highly compensated participants

In the case of a highly compensated participant, subsection (a) shall not apply to any benefit attributable to a plan year for which the plan discriminates in favor of—

(A)highly compensated individuals as to eligibility to participate, or

(B)highly compensated participants as to contributions and benefits.

(2) Key employees

In the case of a key employee (within the meaning of section
416(i)(1)),subsection (a) shall not apply to any benefit attributable to a plan for which the statutory nontaxable benefits provided to key employees exceed 25 percent of the aggregate of such benefits provided for all employees under the plan. For purposes of the preceding sentence, statutory nontaxable benefits shall be determined without regard to the second sentence of subsection (f).

(3) Year of inclusion

For purposes of determining the taxable year of inclusion, any benefit described in paragraph (1) or (2) shall be treated as received or accrued in the taxable year of the participant or key employee in which the plan year ends.

(c) Discrimination as to benefits or contributions

For purposes of subparagraph (B) of subsection (b)(1), a cafeteria plan does not discriminate where qualified benefits and total benefits (or employer contributions allocable to qualified benefits and employer contributions for total benefits) do not discriminate in favor of highly compensated participants.

(d) Cafeteria plan defined

For purposes of this section—

(1) In general

The term “cafeteria plan” means a written plan under which—

(A)all participants are employees, and

(B)the participants may choose among 2 or more benefits consisting of cash and qualified benefits.

(2) Deferred compensation plans excluded

(A) In general

The term “cafeteria plan” does not include any plan which provides for deferred compensation.

(B) Exception for cash and deferred arrangements

Subparagraph (A) shall not apply to a profit-sharing or stock bonus plan or rural cooperative plan (within the meaning of section
401(k)(7)) which includes a qualified cash or deferred arrangement (as defined in section
401(k)(2)) to the extent of amounts which a covered employee may elect to have the employer pay as contributions to a trust under such plan on behalf of the employee.

Subparagraph (A) shall not apply to a plan maintained by an educational organization described in section
170(b)(1)(A)(ii) to the extent of amounts which a covered employee may elect to have the employer pay as contributions for post-retirement group life insurance if—

(i)all contributions for such insurance must be made before retirement, and

(ii)such life insurance does not have a cash surrender value at any time.

For purposes of section
79, any life insurance described in the preceding sentence shall be treated as group-term life insurance.

(D) Exception for health savings accounts

Subparagraph (A) shall not apply to a plan to the extent of amounts which a covered employee may elect to have the employer pay as contributions to a health savings account established on behalf of the employee.

(e) Highly compensated participant and individual defined

For purposes of this section—

(1) Highly compensated participant

The term “highly compensated participant” means a participant who is—

(A)an officer,

(B)a shareholder owning more than 5 percent of the voting power or value of all classes of stock of the employer,

(C)highly compensated, or

(D)a spouse or dependent (within the meaning of section
152, determined without regard to subsections (b)(1), (b)(2), and (d)(1)(B) thereof) of an individual described in subparagraph (A), (B), or (C).

(2) Highly compensated individual

The term “highly compensated individual” means an individual who is described in subparagraphs [1] (A), (B), (C), or (D) of paragraph (1).

(f) Qualified benefits defined

For purposes of this section, the term “qualified benefit” means any benefit which, with the application of subsection (a), is not includible in the gross income of the employee by reason of an express provision of this chapter (other than section
106(b),
117,
127, or
132). Such term includes any group term life insurance which is includible in gross income only because it exceeds the dollar limitation of section
79 and such term includes any other benefit permitted under regulations. Such term shall not include any product which is advertised, marketed, or offered as long-term care insurance.

(g) Special rules

(1) Collectively bargained plan not considered discriminatory

For purposes of this section, a plan shall not be treated as discriminatory if the plan is maintained under an agreement which the Secretary finds to be a collective bargaining agreement between employee representatives and one or more employers.

(2) Health benefits

For purposes of subparagraph (B) of subsection (b)(1), a cafeteria plan which provides health benefits shall not be treated as discriminatory if—

(A)contributions under the plan on behalf of each participant include an amount which—

(i)equals 100 percent of the cost of the health benefit coverage under the plan of the majority of the highly compensated participants similarly situated, or

(ii)equals or exceeds 75 percent of the cost of the health benefit coverage of the participant (similarly situated) having the highest cost health benefit coverage under the plan, and

(B)contributions or benefits under the plan in excess of those described in subparagraph (A) bear a uniform relationship to compensation.

(i)No employee is required to complete more than 3 years of employment with the employer or employers maintaining the plan as a condition of participation in the plan, and the employment requirement for each employee is the same.

(ii)Any employee who has satisfied the employment requirement of clause (i) and who is otherwise entitled to participate in the plan commences participation no later than the first day of the first plan year beginning after the date the employment requirement was satisfied unless the employee was separated from service before the first day of that plan year.

(4) Certain controlled groups, etc.

All employees who are treated as employed by a single employer under subsection (b), (c), or (m) ofsection
414 shall be treated as employed by a single employer for purposes of this section.

(h) Special rule for unused benefits in health flexible spending arrangements of individuals called to active duty

(1) In general

For purposes of this title, a plan or other arrangement shall not fail to be treated as a cafeteria plan or health flexible spending arrangement merely because such arrangement provides for qualified reservist distributions.

(2) Qualified reservist distribution

For purposes of this subsection, the term “qualified reservist distribution” means,[2] any distribution to an individual of all or a portion of the balance in the employee’s account under such arrangement if—

(A)such individual was (by reason of being a member of a reserve component (as defined in section
101 of title
37, United States Code)) ordered or called to active duty for a period in excess of 179 days or for an indefinite period, and

(B)such distribution is made during the period beginning on the date of such order or call and ending on the last date that reimbursements could otherwise be made under such arrangement for the plan year which includes the date of such order or call.

(i) Limitation on health flexible spending arrangements

(1) In general

For purposes of this section, if a benefit is provided under a cafeteria plan through employer contributions to a health flexible spending arrangement, such benefit shall not be treated as a qualified benefit unless the cafeteria plan provides that an employee may not elect for any taxable year to have salary reduction contributions in excess of $2,500 made to such arrangement.

(2) Adjustment for inflation

In the case of any taxable year beginning after December 31, 2013, the dollar amount in paragraph (1) shall be increased by an amount equal to—

(A)such amount, multiplied by

(B)the cost-of-living adjustment determined under section
1(f)(3) for the calendar year in which such taxable year begins by substituting “calendar year 2012” for “calendar year 1992” in subparagraph (B) thereof.

If any increase determined under this paragraph is not a multiple of $50, such increase shall be rounded to the next lowest multiple of $50.

(j) Simple cafeteria plans for small businesses

(1) In general

An eligible employer maintaining a simple cafeteria plan with respect to which the requirements of this subsection are met for any year shall be treated as meeting any applicable nondiscrimination requirement during such year.

(2) Simple cafeteria plan

For purposes of this subsection, the term “simple cafeteria plan” means a cafeteria plan—

(A)which is established and maintained by an eligible employer, and

(B)with respect to which the contribution requirements of paragraph (3), and the eligibility and participation requirements of paragraph (4), are met.

(3) Contribution requirements

(A) In general

The requirements of this paragraph are met if, under the plan the employer is required, without regard to whether a qualified employee makes any salary reduction contribution, to make a contribution to provide qualified benefits under the plan on behalf of each qualified employee in an amount equal to—

(i)a uniform percentage (not less than 2 percent) of the employee’s compensation for the plan year, or

(ii)an amount which is not less than the lesser of—

(I)6 percent of the employee’s compensation for the plan year, or

(II)twice the amount of the salary reduction contributions of each qualified employee.

The requirements of subparagraph (A)(ii) shall not be treated as met if, under the plan, the rate of contributions with respect to any salary reduction contribution of a highly compensated or key employee at any rate of contribution is greater than that with respect to an employee who is not a highly compensated or key employee.

(C) Additional contributions

Subject to subparagraph (B), nothing in this paragraph shall be treated as prohibiting an employer from making contributions to provide qualified benefits under the plan in addition to contributions required under subparagraph (A).

(D) Definitions

For purposes of this paragraph—

(i)Salary reduction contribution
The term “salary reduction contribution” means, with respect to a cafeteria plan, any amount which is contributed to the plan at the election of the employee and which is not includible in gross income by reason of this section.

(ii)Qualified employee
The term “qualified employee” means, with respect to a cafeteria plan, any employee who is not a highly compensated or key employee and who is eligible to participate in the plan.

(iii)Highly compensated employee
The term “highly compensated employee” has the meaning given such term by section
414(q).

(iv)Key employee
The term “key employee” has the meaning given such term by section
416(i).

(4) Minimum eligibility and participation requirements

(A) In general

The requirements of this paragraph shall be treated as met with respect to any year if, under the plan—

(i)all employees who had at least 1,000 hours of service for the preceding plan year are eligible to participate, and

(ii)each employee eligible to participate in the plan may, subject to terms and conditions applicable to all participants, elect any benefit available under the plan.

(B) Certain employees may be excluded

For purposes of subparagraph (A)(i), an employer may elect to exclude under the plan employees—

(i)who have not attained the age of 21 before the close of a plan year,

(ii)who have less than 1 year of service with the employer as of any day during the plan year,

(iii)who are covered under an agreement which the Secretary of Labor finds to be a collective bargaining agreement if there is evidence that the benefits covered under the cafeteria plan were the subject of good faith bargaining between employee representatives and the employer, or

(iv)who are described in section
410(b)(3)(C) (relating to nonresident aliens working outside the United States).

A plan may provide a shorter period of service or younger age for purposes of clause (i) or (ii).

(5) Eligible employer

For purposes of this subsection—

(A) In general

The term “eligible employer” means, with respect to any year, any employer if such employer employed an average of 100 or fewer employees on business days during either of the 2 preceding years. For purposes of this subparagraph, a year may only be taken into account if the employer was in existence throughout the year.

(B) Employers not in existence during preceding year

If an employer was not in existence throughout the preceding year, the determination under subparagraph (A) shall be based on the average number of employees that it is reasonably expected such employer will employ on business days in the current year.

(C) Growing employers retain treatment as small employer

(i)In general
If—

(I)an employer was an eligible employer for any year (a “qualified year”), and

(II)such employer establishes a simple cafeteria plan for its employees for such year,

then, notwithstanding the fact the employer fails to meet the requirements of subparagraph (A) for any subsequent year, such employer shall be treated as an eligible employer for such subsequent year with respect to employees (whether or not employees during a qualified year) of any trade or business which was covered by the plan during any qualified year.

(ii)Exception
This subparagraph shall cease to apply if the employer employs an average of 200 or more employees on business days during any year preceding any such subsequent year.

(D) Special rules

(i)Predecessors
Any reference in this paragraph to an employer shall include a reference to any predecessor of such employer.

(ii)Aggregation rules
All persons treated as a single employer under subsection (a) or (b) ofsection
52, or subsection (n) or (o) ofsection
414, shall be treated as one person.

(6) Applicable nondiscrimination requirement

For purposes of this subsection, the term “applicable nondiscrimination requirement” means any requirement under subsection (b) of this section, section
79(d), section
105(h), or paragraph (2), (3), (4), or (8) of section
129(d).

(7) Compensation

The term “compensation” has the meaning given such term by section
414(s).

Pub. L. 111–148, title I, § 1515,Mar. 23, 2010, 124 Stat. 258, provided that, applicable to taxable years beginning after Dec. 31, 2013, subsection (f) of this section is amended as follows:
(1) by striking “For purposes of this section, the term” and inserting “For purposes of this section—
“(1) In general

“The term”;

(2) by striking “Such term shall not include” and inserting the following:
“(2) Long-term care insurance not qualified

“The term ‘qualified benefit’ shall not include”; and

(3) by adding at the end the following new paragraph:
(3) Certain exchange-participating qualified health plans not qualified
(A) In general

The term “qualified benefit” shall not include any qualified health plan (as defined in section 1301(a) of the Patient Protection and Affordable Care Act) offered through an Exchange established under section 1311 of such Act.

(B) Exception for exchange-eligible employers

Subparagraph (A) shall not apply with respect to any employee if such employee’s employer is a qualified employer (as defined in section 1312(f)(2) of the Patient Protection and Affordable Care Act) offering the employee the opportunity to enroll through such an Exchange in a qualified health plan in a group market.

Subsec. (i). Pub. L. 111–148, § 10902(a), amended subsec. (i) generally. Prior to amendment, text read as follows: “For purposes of this section, if a benefit is provided under a cafeteria plan through employer contributions to a health flexible spending arrangement, such benefit shall not be treated as a qualified benefit unless the cafeteria plan provides that an employee may not elect for any taxable year to have salary reduction contributions in excess of $2,500 made to such arrangement.”

2003—Subsec. (d)(2)(D). Pub. L. 108–173, which directed the amendment of section
125(d)(2) by adding subpar. (D), was executed to this section, which is section 125(d)(2) of the Internal Revenue Code of 1986, to reflect the probable intent of Congress.

1996—Subsec. (f). Pub. L. 104–191, § 321(c)(1), inserted at end “Such term shall not include any product which is advertised, marketed, or offered as long-term care insurance.”

Subsec. (d)(2). Pub. L. 101–140, § 203(b)(2), amended par. (2) generally. Prior to amendment, par. (2) read as follows: “The term ‘cafeteria plan’ does not include any plan which provides for deferred compensation. The preceding sentence shall not apply in the case of a profit-sharing or stock bonus plan which includes a qualified cash or deferred arrangement (as defined in section
401(k)(2)) to the extent of amounts which a covered employee may elect to have the employer pay as contributions to a trust under such plan on behalf of the employee.”

“(1) amounts shall not be included in gross income of a participant in such plan solely because, under the plan, the participant may choose among the benefits of the plan, and

“(2) if the plan fails to meet the requirements of subsection (b) for any plan year—

“(A) paragraph (1) shall not apply, and

“(B) notwithstanding any other provision of part III of this subchapter, any qualified benefits received under such cafeteria plan by a highly compensated employee for such plan year shall be included in the gross income of such employee for the taxable year with or within which such plan year ends.”

Subsec. (b)(1). Pub. L. 100–647, § 1011B(a)(11)(B), substituted “In the case of a highly compensated employee, subsection (a) shall not apply to any benefit attributable to a plan year” for “A plan shall be treated as failing to meet the requirements of this subsection”, see Codification note above.

Subsec. (b)(2). Pub. L. 100–647, § 1011B(a)(11)(C), substituted “subsection (a) shall not apply to any plan year” for “a plan shall be treated as failing to meet the requirements of this subsection” in first sentence, see Codification note above.

Pub. L. 100–647, § 1011B(a)(13)(B), substituted “shall not include benefits which (without regard to this paragraph) are includible in gross income” for “shall be determined without regard to the last sentence of subsection (e)”, see Codification note above.

Subsec. (c)(2)(C). Pub. L. 100–647, § 6051(b), inserted at end “In applying section
89 to a plan described in this subparagraph, contributions under the plan shall be tested as of the time the contributions were made.”, see Codification note above.

Subsec. (e)(2)(A). Pub. L. 100–647, § 4002(b)(2), inserted “or any insurance under a qualified group legal services plan the value of which is so includable only because it exceeds the limitation of section
120(a)” after “section
79”, see Codification note above.

1986—Pub. L. 99–514, § 1151(d)(1), amended section generally, revising and restating as subsecs. (a) to (g) provisions of former subsecs. (a) to (i) so as to coincide with the coming into effect of section
89 of this title.

Subsec. (f). Pub. L. 99–514, § 1853(b)(1)(B), substituted “Qualified benefits defined” for “Statutory nontaxable benefits defined” in heading and amended text generally. Prior to amendment, text read as follows: “For purposes of this section, the term ‘statutory nontaxable benefit’ means any benefit which, with the application of subsection (a) is not includible in the gross income of the employee by reason of an express provision of this chapter (other than section
117,
124,
127, or
132). Such term includes any group term life insurance which is includible in gross income only because it exceeds the dollar limitation of section
79.”

Subsec. (d)(1). Pub. L. 98–369, § 531(b)(1), substituted “among 2 or more benefits consisting of cash and statutory nontaxable benefits” for “among two or more benefits” in cl. (B) and struck out “The benefits which may be chosen may be nontaxable benefits, or cash, property, or other taxable benefits.”

Subsec. (f). Pub. L. 98–369, § 531(b)(2)(A), amended subsec. (f) generally, inserting “Statutory” in heading and “statutory” before “nontaxable benefit” in text, providing that the benefit be excluded by reason of an express provision of this chapter (other than section
117,
124,
127, or
132), and extending the benefit to include group term life insurance.

1980—Subsec. (d)(2). Pub. L. 96–605, § 226(a), inserted provision that the sentence excluding deferred compensation plans not apply in the case of a profit-sharing or stock bonus plan which includes a qualified cash or deferred arrangement, as defined in section
401(k)(2) to the extent of amounts which a covered employee may elect to have the employer pay as contributions to a trust under such plan on behalf of the employee.

Pub. L. 110–245, title I, § 114(b),June 17, 2008, 122 Stat. 1636, provided that: “The amendment made by this section [amending this section] shall apply to distributions made after the date of the enactment of this Act [June 17, 2008].”

Effective Date of 2004 Amendment

Amendment by Pub. L. 108–311applicable to taxable years beginning after Dec. 31, 2004, see section 208 ofPub. L. 108–311, set out as a note under section
2 of this title.

Effective Date of 2003 Amendment

Amendment by Pub. L. 108–173applicable to taxable years beginning after Dec. 31, 2003, see section 1201(k) ofPub. L. 108–173, set out as a note under section
62 of this title.

Effective Date of 1996 Amendment

Amendment by section 301(d) ofPub. L. 104–191applicable to taxable years beginning after Dec. 31, 1996, see section 301(j) ofPub. L. 104–191, set out as a note under section
62 of this title.

Amendment by section 321(c)(1) ofPub. L. 104–191applicable to contracts issued after Dec. 31, 1996, see section 321(f) ofPub. L. 104–191, set out as an Effective Date note under section
7702B of this title.

Effective Date of 1989 Amendments

Amendment by Pub. L. 101–239effective, except as otherwise provided, as if included in the provision of the Technical and Miscellaneous Revenue Act of 1988, Pub. L. 100–647, to which such amendment relates, see section 7817 ofPub. L. 101–239, set out as a note under section
1 of this title.

Amendment by sections
1011B(a)(11)–(13) and 1018(t)(6) of Pub. L. 100–647effective, except as otherwise provided, as if included in the provision of the Tax Reform Act of 1986, Pub. L. 99–514, to which such amendment relates, see section 1019(a) ofPub. L. 100–647, set out as a note under section
1 of this title.

Amendment by section 4002(b)(2) ofPub. L. 100–647applicable to taxable years ending after Dec. 31, 1987, see section 4002(c) ofPub. L. 100–647, set out as a note under section
120 of this title.

Pub. L. 100–647, title VI, § 6051(c),Nov. 10, 1988, 102 Stat. 3696, provided that: “The amendments made by this section [amending this section and section
89 of this title] shall take effect as if included in the amendments made by section 1151 of the Reform Act [Pub. L. 99–514, see Effective Date of 1986 Amendment note set out under section
79 of this title].”

Effective Date of 1986 Amendment

Amendment by section 1151(d)(1) ofPub. L. 99–514applicable, with certain qualifications and exceptions, to years beginning after Dec. 31, 1988, see section 1151(k) ofPub. L. 99–514, as amended, set out as a note under section
79 of this title.

Amendment by section 1853(b)(1) ofPub. L. 99–514effective, except as otherwise provided, as if included in the provisions of the Tax Reform Act of 1984, Pub. L. 98–369, div. A, to which such amendment relates, see section 1881 ofPub. L. 99–514, set out as a note under section
48 of this title.

Amendment by Pub. L. 96–222effective, except as otherwise provided, as if it had been included in the provisions of the Revenue Act of 1978, Pub. L. 95–600, to which such amendment relates, see section 201 ofPub. L. 96–222, set out as a note under section
32 of this title.

For provisions that nothing in amendment by Pub. L. 101–508be construed to affect treatment of certain transactions occurring, property acquired, or items of income, loss, deduction, or credit taken into account prior to Nov. 5, 1990, for purposes of determining liability for tax for periods ending after Nov. 5, 1990, see section 11821(b) ofPub. L. 101–508, set out as a note under section
45K of this title.

Nonenforcement of Amendment Made by Section 1151 of Pub. L. 99–514 for Fiscal Year 1990

Pub. L. 100–647, title VI, § 6063,Nov. 10, 1988, 102 Stat. 3700, provided that: “For purposes of section 125 of the 1986 Code, a plan shall not be treated as failing to be a cafeteria plan solely because under the plan a participant elected before January 1, 1989, to receive reimbursement under the plan for dependent care assistance for periods after December 31, 1988, and such assistance is includible in gross income under the provisions of the Family Support Act of 1988 [Pub. L. 100–485, see Tables for classification].”

For provision that for purposes of section 125 of the Internal Revenue Code of 1986, a plan shall not be treated as failing to be a cafeteria plan solely because under the plan a participant elected before January 1, 1988, to receive reimbursement under the plan for dependent care assistance for periods after December 31, 1987, and such assistance included reimbursement for expenses at a camp where the dependent stays overnight, see section 10101(b)(2) ofPub. L. 100–203, as added by Pub. L. 100–647, set out as an Effective Date of 1987 Amendment note under section
21 of this title.

“(A) General transitional rule.—Any cafeteria plan in existence on February 10, 1984, which failed as of such date and continued to fail thereafter to satisfy the rules relating to section
125 under proposed Treasury regulations, and any benefit offered under such a cafeteria plan which failed as of such date and continued to fail thereafter to satisfy the rules of section
105,
106,
120, or
129 under proposed Treasury regulations, will not fail to be a cafeteria plan under section
125 or a nontaxable benefit under section
105,
106,
120, or
129 solely because of such failures. The preceding sentence shall apply only with respect to cafeteria plans and benefits provided under cafeteria plans before the earlier of—

“(i) January 1, 1985, or

“(ii) the effective date of any modification to provide additional benefits after February 10, 1984.

“(B) Special transition rule for advance election benefit banks.—Any benefit offered under a cafeteria plan in existence on February 10, 1984, which failed as of such date and continued to fail thereafter to satisfy the rules of section
105,
106,
120, or
129 under proposed Treasury regulations because an employee was assured of receiving (in cash or any other benefit) amounts available but unused for covered reimbursement during the year without regard to whether he incurred covered expenses, will not fail to be a nontaxable benefit under such applicable section solely because of such failure. The preceding sentence shall apply only with respect to benefits provided under cafeteria plans before the earlier of—

“(i) July 1, 1985, or

“(ii) the effective date of any modification to provide additional benefits after February 10, 1984.

Except as provided in Treasury regulations, the special transition rule is available only for benefits with respect to which, after December 31, 1984, contributions are fixed before the period of coverage and taxable cash is not available until the end of such period of coverage.

“(C) Plans for which substantial implementation costs were incurred.—For purposes of this paragraph, any plan with respect to which substantial implementation costs had been incurred before February 10, 1984, shall be treated as in existence on February 10, 1984.

“(D) Collective bargaining agreements.—In the case of any cafeteria plan in existence on February 10, 1984, and maintained pursuant to 1 or more collective bargaining agreements between employee representatives and 1 or more employers, the date on which the last of such collective bargaining agreements terminates (determined without regard to any extension thereof agreed to after July 18, 1984) shall be substituted for ‘January 1, 1985’ in subparagraph (A) and for ‘July 1, 1985’ in subparagraph (B). For purposes of the preceding sentence, any plan amendment made pursuant to a collective bargaining agreement relating to the plan which amends the plan solely to conform to any requirement added by this section (or any requirement in the regulations under section 125 of the Internal Revenue Code of 1954 [now 1986] proposed on May 6, 1984) shall not be treated as a termination of such collective bargaining agreement.

“(E) Special rule where contributions or reimbursements suspended.—For purposes of subparagraphs (A) and (B), a plan shall not be treated as not continuing to fail to satisfy the rules referred to in such subparagraphs with respect to any benefit provided in the form of a flexible spending arrangement merely because contributions or reimbursements (or both) with respect to such plan were suspended before January 1, 1985.”

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